March FX Update: Brexit, Trade Wars and Central Bank

Highlights from February

For the most part, February was the calm before the storm as Theresa May pushed back the meaningful vote to the end of the month. We saw little change in GBP volatility as the markets were left in wait and see mode. In the last week of the month the pound exploded into life as the Brexit endgame deepened divisions within both parties. Labour’s Jeremy Corbyn put his backing behind a second referendum following a split in his party. In addition, Theresa May promised three important votes to be held in mid-March. Firstly there will be a meaningful vote on May’s Brexit deal. If it is voted down there will be a further vote on the 13th on whether parliament can support leaving the EU without a deal. If parliament votes to avoid a no-deal scenario there will be another vote on the 14th to seek an extension. In summary, the developments have helped firm the pound as there is now less chance of a no deal outcome.

The US and China are seemingly on the final path to a trade agreement. The soundbites from both sides have been positive, with Trump’s economic advisor stating that the US and China were on the verge of a historic pact. A mechanism is now in place to continue talks and there are hopes that an agreement will follow soon. A deal would be a welcome relief and would support risk appetite and global growth.
The Bank of England is widely expected to stay on hold until post Brexit, especially given the mixed signals from the UK economy. The Bank would need to be reactive to a no-deal Brexit outcome, which could lead to a cut in rates, or a deal outcome which could quickly lead the UK to a hiking cycle mirroring that of the US. The FOMC are still talking tough and gearing up for two or possibly three hikes in 2019. The ECB are still well behind the curve and the expected date for a rate hike seems to be getting pushed back rather than pulled forward in line with weaker economic data.

What are the market themes for March?

Brexit Negotiations Impact

With the clock running down to the March 29 deadline we now face a very crucial period. In the week from March 11th we have a further meaningful vote on Theresa May’s Brexit deal. It would take clarification on the crucial backstop issue to get the deal over the line. If the deal is rejected (as expected) this would trigger a vote on the 13th about the prospect of a no-deal outcome. Voting down a no-deal scenario would result in a final vote on the 14th, which would seek to extend Article 50. The pound is moderately bullish ahead of the scheduled votes as all outcomes are (on the face of it) positive for the pound, with the chances of a no-deal outcome being reduced. Given how quickly things can change, nothing can be taken for granted and even if the commons votes to extend Article 50 this still needs to be signed off by all EU member states.

Central Banks Impact

The Fed are clearly signalling that they are nearing the end of their hiking cycle, however we could still see two further hikes in 2019. With oil prices shifting higher and the Fed repricing to factor in a rate cut by the end of 2020, the momentum is now over in the hiking cycle. The Bank of England should be interesting moving forward as the Bank will be reactive to the outcome of Brexit and could look to cut rates on a no-deal exit or potentially start a hiking cycle on the back of an orderly exit. The ECB are on a slow path to normalisation and we do not expect any increase in rates until the latter half of 2019.

US-China Trade War Impact

We could get the much awaited trade deal between the US and China as soon as the USD end of this month. A potential signing meeting is being planned for around the 27th March and optimism is running high. An agreed trade deal would look to roll back most of the tariffs implemented from the start of the fracas. The likely outcome will be more open trade, a more open Chinese economy and more protection of intellectual property than before. This should be very positive for global trade and sentiment. However we should not take an agreement for granted and we’ll be on the lookout for any updates.

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